INSUBCONTINENT EXCLUSIVE:
India's debt fund managers are looking beyond credit ratings while picking corporate bonds this year
Top fund managers say they now try to look at company financials, especially leveraged positions, more closely before taking a call on
available papers.
While a growing pileup of bad debt from India Inc had turned fund managers cautious over the past three years, a more
immediate trigger for them was the recent hardening of interest rate outlook.
"In last six months or so, we have become a bit more cautious
in terms of credit outlook," says Amandeep Chopra, Group President and Head of Fixed Income at UTI Mutual Fund, India's oldest fund
house.
"As rising interest rates raise cost of capital for companies, it will impact cash flows if a company is heavily leveraged
So you need to look at leverage, margins and debt matrix more carefully to see if it can handle more rate hikes," said Chopra, who oversees
a corpus exceeding Rs 93,000 crore.
The Reserve Bank of India (RBI) raised the policy repo rate by 25 basis points to 6.25 per cent on June
The effect of the same has begun to reflect in MCLR, or marginal cost of funds-based lending rates, of banks and loans have become more
Similarly, borrowing through bonds, too, has become costlier
Some 12 top Indian companies are facing bankruptcy proceedings after RBI mandated banks to take legal recourse to recover non-performing
loans.
Nearly Rs 10 lakh crore, or $150 billion, worth of bank debt to Indian corporates had gone sour as of March this year
The figure, which included non-performing assets (NPAs) as well as restructured or rolled-over loans, has improved some bit in recent months
amid relentless pursuits by banks and an improvement in the economy.
There was a fourfold spike in bank NPAs since 2014, when the Modi
An economic slowdown during the 2012-14 period and years of profligate lending led to the mess, which in turn choked fresh lending and
proved a drag on economic growth.
Sebi data shows domestic mutual funds pulled out Rs 14,085.55 crore from debt securities in May, making it
the worst month for their exposure to domestic debt in five years
That number compared with some Rs 20,164.82 crore investments that they had made in these assets in April and Rs 9,514.37 crore in May
2017.
Chopra says his team is following two broad strategies
"For high investment grade investments, the rating floor is AA
Yet, most funds will typically have 75 per cent in papers rated AAA or equivalents," he said.
An AAA-rated bond is said to have an
exceptional degree of creditworthiness because the issue can easily meet its financial commitments
An AA credit rating, on the other hand, reflects an opinion that that the issuer has the current capacity to meet its debt obligations and
faces slightly higher solvency risk from changes in business, financial, or economic conditions than an AAA-rated instrument.
Debt fund
managers also run credit risk funds, or credit opportunities funds, which seek to achieve capital appreciation over the long term by
investing predominantly in corporate debt across credit spectrum, within the universe of investment grade rating.
At UTI, such funds have at
least 65 per cent of their investment in instruments rated AA or lower, Chopra said
"There, we are focussed more on a bottom-up approach of investing
There, we would look deeper into the company's finances, rather than simply looking at the ratings
If we have to pick an A, or a plus-AA entity, we would pick that based on our study of the company's finances
If I have to pick between two AA-rated corporate entities and if I feel one is most sensitive to interest rates and the other one is
somewhat more protected or insulated from any sharp rise in interest rate, I will choose the former and not the later," he said.
Chopra
expects RBI to go for at least three rate hikes this year, as the inflation outlook in the economy worsened amid a spike in global crude oil
prices and the government plan to raise minimum support price (MSP) for various crops to boost farm income.
"Our inflation outlook even at
higher crude will be 5.5 or 5.75 per cent, and then it should start moderating
Even if you build in a 100 bps headroom, there could be at least three rate hikes this year, one of which is already behind us," Chopra
said.
Select debt category funds have been creating a lot buzz over the past few months.
Chopra said while in a long-term horizon of five
years or so, equity will do better, the outlook for debt looks more positive over the next 12 months or so.
"Rates are a lot more attractive
today than they were 12 months ago
While people are looking at the recent spike in bond yields in a negative way, for investors who are trying to put money in the market now,
the right way to look at it would be that rates today are lot more attractive and even in a very nominal way, interest rates are offering
wide real interest rates from return perspective," he said.
A typical three-year or five-year AAA bonds, which do not carry a very high
credit risk, are offering between 8.5-8.6 per cent at present.
To ride this wave, investors are betting on three-year fixed maturity plans
or a short-term income funds, which typically have an average maturity of two to three years
"Investors should focus on the short end of the yield curve
There are three-four products such as short-term income funds, select low credit risk funds and FMPs, which can protect downsides and give
reasonable rate of returns
"FMPs are your option in case you do not like to live with the day-to-day volatility," Chopra said.
He said the equity market will remain
volatile over the next 24 months, as there a lot of uncertainty around in terms of domestic macros, elections and tightening by the US Fed
"If you can handle volatility, even open-ended funds should be as good."
